Investment Returns on a VC Fund

Investment Returns on a VC Fund

August 31, 2022 by investor

Investment Returns on a VC Fund

In a VC fund, limited partners look for greater returns.

The risks are higher, and the hold times are much longer, so LPs look for better returns than the stock market.

In general, they look for a 10-20% IRR better than the market index.

Historically, top VC funds have a Distributed Paid-In ratio of 3X while the Total Value to Paid-In ratio is 1.5X, not counting the dot-com era.

The manager of the VC fund can improve the performance of the fund in several ways:

Remember, IRR is higher the sooner the funds are returned to the LP.

A VC fund manager can increase the IRR by taking funds in a series of capital calls rather than all upfront.

Most funds ask for ⅓ of the invested capital up front and then two more capital calls in the following years.

In pledge funds, the LPs provide the funding for each deal as it arises.

Another option is to shift some of the management fees into the carry.  This will increase the return to the LPs.

Seventy-five percent of VC funds do not return anything to the limited partner after the fees are accounted for, and most limited partners know this.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.

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